WHAT IS THE DIFFERENCE BETWEEN A Triple Net (NNN) v. GROSS LEASE?
A common question that we receive is for an explanation of the differences between the various commercial real estate lease types. This is especially the most common types, triple net, and gross leases. Before we get into the specific differences between each type of lease, it should be noted that leases are a significant portion of commercial real estate deals. Enough so that lease contracts can involve any commercial property of any size and type. Because of the vast array of situations that could be involved in commercial real estate leases, there are likely many lease agreements that have specific elements that fall outside of the contents of this article. Our goal here is not to encompass every possible situation, but instead to provide you with some clarity and insight into the most common lease types and what they mean for you as the building owner or the tenant.
There are three standard lease types that you might find yourself negotiating for your business or property. They are called NNN (Triple Net), Gross (Full-Service), and Modified Gross (MG) leases.
NNN (or Triple Net) lease agreements are agreements where the tenant pays rent, plus NNN (N-Property Taxes, N-Property Insurance, N-CAM– Common Area Maintenance.) Triple Net leases generally encompass all of the expenses of the building, with a few major capital projects as the general exceptions. As a building owner, you would typically calculate the amount of the total annual costs for these three “N” items, and divide it by the total number of rental square footage in the building. Single-tenant buildings, especially retail tenants, then divide the annual total again by 12 to arrive at an estimated monthly rate.
Pro: Triple Net lease agreements allow you as a lessee to manage and oversee the cost of utilities and maintenance and the quality of service provided. It also allows you owners to have a largely passive role as landlords, and only incur expenses in the upkeep of your building(s) when there is a structural expense (roof maintenance, etc.)
Con: As a tenant, you have a higher responsibility for the building, and will at times have to pay out-of-pocket unexpectedly for larger maintenance bills. Likewise, you who are owners will have an overall lower gross rent rate.
Gross lease agreements (also known as full-service leases) typically include the costs of everything (taxes, insurance, utilities, maintenance, and in some cases janitorial services) into the total lease.
Pro: Gross lease agreements make it easy for those of you who are tenant businesses to plan, since rent is the same dollar amount month-to-month. And, you building owners receive higher rent rates.
Con: For you tenants, gross lease agreements CAN be more expensive than NNN leases. Although over the long term, the costs tend to average out to be fairly equal due to the higher responsibility held by NNN Tenants. As owners, you would bear responsibility for all building maintenance and associated costs, which often requires owners to be at least somewhat engaged in the day-to-day operations of the building.
Modified Gross lease agreements are somewhere between NNN and Gross leases, most often having you landlords cover taxes, property insurance, and major repairs, while you tenants may pay utilities, maintenance, and minor repairs.
Pro: This option allows flexibility in how the deal gets made, allowing you all (tenants and owners) to find a working relationship that functions well for your goals.
Con: Modified Gross leases require significant clarity around who is responsible for what.
In case it wasn’t clear in the definition given under NNN, here is a typical definition of CAM:
CAM (Common Area Maintenance) is a common term used in commercial leases and describes the costs involved in the upkeep and repair of the shared parts of the building. Most multi-tenant buildings have shared hallways and parking lots at a minimum. Many have elevators, lobbies, restrooms, and more. It is very common for tenants to share the costs on a pro-rata basis based on square footage.
These are the most common lease structures, and usually provide the basis or starting point for most lease arrangements. Happy Leasing!